Advisers need to do more to get pension savers into investments that perform, says Teresa Hunter
Advisers get wrongly blamed for everything: markets going down; markets going up; asking too many questions; not asking enough questions; wearing the wrong-coloured tie, even.
But there is one issue about which they should hold their heads in shame: the many billions of pounds languishing in old-style insurance funds, or the modern equivalent – default funds.
The performance of some of these has been dire. To be fair, they were never designed to set the world alight. But we have surely reached the stage where this cannot go on.
Maximising the potential of good performance will become even more crucial in the years ahead.
With the whole nation, apart from those working for the state, relying on DC pensions, failure to secure good performance could, at some point, become a national crisis, requiring government intervention.
Furthermore, if people continue to boycott annuities, at least for some of their retirement savings, these could potentially be invested for up to 70 years. There can be few excuses about underperformance due to the need to play safe over such a timeframe.
But underperformance is what we have by the bucketful.
Pensions bought from traditional pension firms before 2000 are virtually all held in insurance company funds. However, over the past decade the average insurance company mixed fund has grown by 61 per cent, while global equities have returned 112 per cent. Invesco Perpetual’s High Income has outperformed comparable insurance company UK Equity Income funds by as much as 72.2 per cent over 10 years.
On a £30,000 investment, a customer would have pocketed an extra £21,660 over this period with Invesco. Add a nought to both figures and it doesn’t bear thinking about. This is big money to be turning a blind eye to – not to mention bordering on negligence.
Here, surely, is a role for advisers. Unfortunately, however, several of the large insurers, including Aviva, Legal & General and Prudential, restrict policyholders’ investment options to their own internally managed funds.
A few, such as Aegon, Royal London, Scottish Widows and Standard Life, will allow customers access to external management. In the main, though, they have opened the door on only a couple of funds, like Invesco Perpetual High Income.
It would be wonderful to heap praise on them for customer-centric flexibility but the charges for going outside are eye-burning. For example, Aegon charges 2.2 per cent for Fund Smith, compared with a typical platform charge of 1.4 per cent, or 1.9 per cent for Newton Global Income, which can be had for 1.09 per cent elsewhere.
Higher fees over a long period can have a severe impact. This level of charging can wipe £3,000 off the return on a £30,000 investment over 10 years, at 5 per cent growth.
There seem to be a few things colluding to keep charges high. First, companies simply add what they have to pay the external manager on to their policy fee without reducing that fee now that they are not providing fund management themselves. Second, they say soaring charges can be justified because high commissions were paid to the salesmen who sold the contracts. That is not the policyholder’s fault. And how is it fair to penalise them for the company’s folly 20 or 30 years after the policy was started?
There are better options for more modern clients as even the traditional insurers now largely have their own platforms offering access to up to 5,000 funds, at competitive prices.
Yet the bulk of new contributions is still going into lacklustre managed and default funds.
Advisers should ask themselves urgently whether this is acceptable and, if not, what they are prepared to do about it. At the very least, they should be pressing insurers to increase savers’ access to quality fund management, and at an affordable price.
All funds and managers can find themselves in a dark place; there are no guarantees with performance. However, if you invest with a good manager who has a long-term sustainable record, you are unlikely to regret sticking with them over the years – or so we are told.
But what if you have to pay an excessive fee charge to gain exposure to that quality of fund management? Does it then make sense to move? These are difficult questions.
The cheapest option would be to switch to a tracker. Sadly, few insurers include trackers in their range of options for policyholders.